Furniture industry dips in third quarter
Consultant characterizes declines as a ‘correction’ after an unusually strong second quarter.
The furniture industry is slowing on pace with the national economy, according to Michael A. Dunlap & Associates’ latest report.
The Holland-based consulting firm released the results of its October 2019 quarterly MADA/OFI (Office Furniture Industry) Trends Survey on Nov. 4. The report, which began in 2004 and is in its 59th edition, measures the current business activity of the office, education, health care and hospitality furniture industry and its suppliers.
The survey — which will repeat in January — was sent to more than 540 individuals involved with the commercial furniture industry’s manufacturing and supply chain from Africa, Asia, Australia, Europe, North America and South America, with companies ranging from $500,000 to $1 billion-plus in sales.
In the survey, MADA focuses on 10 key business activities, and respondents rate each area on a scale of 1-10, from lowest to highest.
The activities include gross shipments, order backlog/incoming orders, employment levels, manufacturing hours (overtime vs. reduced hours), capital investment, tooling expenditures, new product development, raw material costs, employee costs and the respondents’ personal outlook on the industry.
The survey uses index numbers to quantify how the industry currently is performing. An index of 100 means things couldn’t be better, an index of 1 is absolutely the worst and an index of 50 means it is neutral — no change up or down.
The Q3 overall index of 53.14, an average of all 10 indexes, slipped 5.76 points from Q2 2019.
Michael Dunlap, owner and president at MADA, said he believes the industry remains strong but is slowing on par with cooling economic growth.
“The effects of the tariffs with China have dampened the third quarter and will likely impact the fourth quarter and first quarter of 2020,” he said. “The overall economic growth seems to be slowing down and will probably affect this industry in 2020.”
Dunlap said the order backlog index plunging over 25 points surprised him the most until he looked back at the survey history and realized Q2 2019’s high of 74 was the anomaly, and Q3 2019’s index at 58.33 was closer to average. Therefore, he considers the drop a “correction.”
“It’s like going from 90 miles an hour to 120 miles an hour and then dropping down to 55. You’re still cruising along, just not at the same rate,” he said.
Regarding the rise in commodity, or raw materials, prices, Dunlap said he expects that trend won’t improve in the fourth quarter and may slightly worsen.
Outside the scope of the survey, Dunlap said he talks to local furniture business leaders who believe tariffs are the new normal and while they may be reduced from the current 25%, they expect they’ll ultimately remain in the 5%-15% range.
Besides tariffs, the most frequently cited perceived threats to the industry’s success in the survey were travel and transportation and logistics costs, as well as the cost of health care.
October 2019 survey highlights
Gross shipments index: October 2019, 58.33; July 2019, 74; survey average, 57.79; all-time high, July 2019, 74; all-time low, April 2009, 22.42
Order backlog index: October 2019, 45.56; July 2019, 71.5; survey average, 57.78; all-time high, July 2019, 71.5; all-time low, July 2009, 25
Employment index*: October 2019, 52.78; July 2019, 57; survey average, 52.89
*The employment index measures the degree of increase or decrease in employment levels.
Hours worked index*: October 2019, 56.67; July 2019, 61.67; survey average, 56.06
*The hours worked index (HWI) is closely tied to the employment index (EI). When the HWI exceeds the mid-50s, usually due to overtime, the following one to two quarters often see increases in the EI. The Q3 2019 HWI is nearly equal to the survey average. Dunlap said this is reflective of the continued inability to fill both entry-level and skilled positions, which is driving up hiring and the HWI. Overtime remains the norm, not the exception.
Capital expenditures index: October 2019, 54.38; July 2019, 54.74; survey average, 55.89; all-time high, April 2017, 64.74
Tooling expenditures index*: October 2019, 52; July 2019, 52.78; survey average, 56.36
*The tooling expenditures index tends to remain steady from quarter to quarter and typically tracks along with capital expenditures, but the continued below average index during Q2 and Q3 “is an unpleasant surprise,” Dunlap said.
New product development index: October 2019, 63.53; July 2019, 61.05; survey average, 63.27; all-time high, April 2015, 69.70
Raw material costs index*: October 2019, 42.50; July 2019, 44.44, survey average, 44.87
*Many commodity prices in Q3 continued to increase. Tariffs were felt during this quarter and that was not reflected in the Q4 2018 or Q1 and Q2 2019. The current index indicates material costs have increased and are higher than the survey average. This likely will worsen in Q4 2019, Dunlap projected.
Employee costs index*: October 2019, 47.55; July 2019, 45.26; survey average, 46.55
*Much like its companion raw materials index, the employee cost index is rarely above 50. Although higher health care costs are the most frequently cited issue leading to higher costs, the wage increases seen in Q2 2019 appear to have stabilized. Dunlap said employee cost increases likely will continue throughout the labor shortage.
Personal outlook index*: October 2019, 57.37; July 2019, 64; survey average, 59.15
*Although it slipped from the previous quarter, it still is quite positive, Dunlap said. The personal outlook index had remained over 61 for the past 22 quarters.
Overall index*: October 2019, 53.14; July 2019, 58.9; survey average, 55.07; all-time high, July 2005, 59.72; all-time low, April 2009, 41.45
*Two out of 10 index values improved from the previous quarter. With the exception of order backlog, the other index changes are within normal or acceptable values, according to Dunlap.
Source: Michael A. Dunlap & Associates